Property prices are going nowhere. Reserve Bank paper explains why

SOME love affairs end in tears. Other times, a relationship sours so gradually that when the final parting comes, it is a relief for all involved.

And so it is with Australians' love affair with property.

A decade ago, dinner parties and barbecues were dominated by talk of house prices and property investments.

Televisions blared with renovations shows in which miracles were performed on derelict bungalows and hey presto, the house sells for double its original value.

Even today, there is no shortage of property spruikers out there to claim the next boom in property prices is about to get underway.

Surveys pinpoint the suburbs in which it is cheaper to buy than rent.

Yes, but only if you assume current variable mortgage rates, which at 5 or 6 per cent are historically low.

To say claim housing affordability has dramatically improved is kind of like saying today is stinking hot, so winter will never happen again.

Interest rates move in cycles and the historical average for mortgage rates is about 7.5 per cent.

Buying a house is a long term bet and borrowers must consider where interest rates may head over the life of the loan.

A more sober look at the Australian property market reveals prices have hit a wall, although remain historically expensive.

Indeed, 2013 marks an important anniversary.

It will be 10 years since the peak of the home price boom in Sydney, which foreshadowed the end of the property price boom in other capital cities.

Between 2003/04 and 2009/10, prices grew just 10 per cent in Sydney.

By contrast they rose between 50 to 60 per cent in Melbourne, Brisbane and Adelaide. And a whopping 100 per cent in Perth.

But the property boom of the 2000s is well and truly at an end.

Capital city house prices peaked in November 2010, according to RP Data.

Two years on, they remain almost six per cent below that peak.

Over the past five years, home prices have clocked average annual growth of just 1.9 per cent.

You would have been better with your money in the bank.

''It is clear that the previous strong value growth conditions to which many home owners became accustomed of recent years are well and truly behind us,'' concludes RP Data's senior research analyst, Cameron Kusher.

'Tis the season for bold predictions about property prices in the year ahead, so here's mine: home prices are going nowhere. Because, well, they can't.

A paper released just before Christmas by the Reserve Bank helps to explain why.

It charts the rise in house prices relative to household income over the past three decades.

In 1981, the typical home sold for $48,000 just a little over three times the median household income of $15,000.

Today, the median home will set you back $408,000 about six-and-a-half times the median household income of $61,000.

There were two main property booms over that time, from 1987 to 1988 and 2001 to 2003.

These booms, the later in particular, were the result of specific events that it is hard to see repeating any time soon.

The boom of the early naughties was driven by a loosening of lending criteria by banks combined with a structural step down in the level of interest rates from their eye-watering highs of around 17 per cent in 1989.

We borrowed more because we could. We spent more on housing because we are richer, and could afford to do so.